Challenge to Section 17(5)(c) and (d) of CGST Act rejected as Supreme Court upheld constitutional validity; Gujarat High Court disposes petition granting liberty to contest SCN on merits

Case Details

Case Title: Sankalp In & Anr. v. Union of India & Ors.
Court: High Court of Gujarat, Ahmedabad
Petition No.: R/Special Civil Application No. 13606 of 2023
Date of Judgement: 25 October 2024
Category of Dispute: Input Tax Credit (blocked credit under Section 17(5))
Relevant Sections: Section 16, Section 17(5)(c) & (d) of the CGST Act, 2017; Schedule II; functional test principle

Facts (Para 2–3)

The petitioners challenged the vires of Section 17(5)(c) and (d) of the CGST Act, 2017, which restrict input tax credit (ITC) on construction of immovable property. They relied on the decision of the Supreme Court in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd. (Civil Appeal No. 2948 of 2023, decided on 3 October 2024). The Apex Court had already upheld the constitutional validity of Section 17(5)(c) & (d). In view of that, the petitioners sought liberty to demonstrate before the adjudicating authority that their case fell outside the mischief of Section 17(5)(d).

Questions (Para 2–3)

Whether ITC can be denied under Section 17(5)(d) for construction of immovable property when such construction is directly linked to business activity, and whether the High Court should strike down the provision as unconstitutional.

Observations (Para 4–5)

The Gujarat High Court noted that the Supreme Court had conclusively upheld the constitutional validity of Section 17(5)(c) & (d). The Apex Court clarified (Paras 64–67 of its judgment) that:

• The provisions are valid and not ambiguous, hence no question of reading them down arises.

• A building can be considered a “plant” if the functionality test shows it is essential to the business of providing services like leasing or renting.

• Each case must be decided factually, applying the functionality test to determine whether the immovable property qualifies as “plant.”

Accordingly, the High Court could not re-examine constitutional validity but permitted petitioners to contest the SCN on merits by applying the functional test principle.

Judgement (Para 5)

The petition was disposed of, granting liberty to the petitioners to respond to the show cause notice on merits in line with the Supreme Court’s ruling. Interim relief stood vacated.

Cases Referred

Between Fine Lines

For businesses, this ruling underscores that ITC on construction of immovable property remains largely blocked under Section 17(5)(d). However, if the immovable property is integrally tied to the business of renting or leasing (like malls, warehouses, or commercial complexes), taxpayers can argue that such property qualifies as a “plant” using the functionality test. The battle has shifted from constitutional challenge to fact-based adjudication.

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